Thomas Ordeberg, Department of Law. Photo: Staffan Westerlund.
Thomas Ordeberg, Department of Law. Photo: Staffan Westerlund.
 
A stockbroker is obligated to provide the customer the best possible outcome when buying and selling securities on the customer’s behalf. This obligation is imposed, on the one hand, throughby specific rules for the financial market and, on the other hand, through ordinary agency rules. While agency rules are very generally formulated, order execution rules are often considerably more detailed. The latter is especially the case in the US, whereas the EU’s order execution regulations (the MiFID directive) are more similar to the broadly worded agency rules in the Member Countries. Nor are there any agency regulations at the EU level; they differ significantly across Member States.

The securities market is trending towards ever-greater competition among exchanges and other trading venues, where newcomers are trying to get into the market. This means that laws regulating the operations of stockbrokers are becoming more and more important, as brokers are required to turn to the trading venue that provides the best outcome for the customer.

In the 1970s the US created a tightly knit system of trading venues that were linked together in an electronic communication network. Since then, information about prices and transactions executed are presented in real time for the entire system. As this information is available, the US has been able to introduce rules that forbid brokers from executing orders at a price that is worse than the best publicly available price within the system. The EU does not have any corresponding system. Lack of consolidated information and links between trading venues results in a less well-functioning market for shares in the EU compared with the US.

According to the order execution regulations in force within the EU, the individual broker is obligated to adopt execution policies that provide the best outcome for customers. Policies tend to be very generally formulated, which means that brokers have a great deal of discretion.

“Some research suggests that many brokers, instead of checking the market, routinely send their orders to the trading venue that has historically provided good outcomes, even though they in fact might no longer offer such outcomes. This means that old, worn-out exchanges survive, while competitive newcomers do not receive orders. Moreover, with a generally worded policy it is more difficult to monitor whether a broker has met the obligations. This creates informational asymmetry between broker and customer. It might not entail major losses for individual customers, but for the customer collective as a whole it’s a matter of a great deal of money,” says Thomas Ordeberg.

Thomas Ordeberg maintains that the EU is facing a crossroads when it comes to making its securities market more efficient. One possibility is to choose the American model with expanded trading infrastructure and detailed regulation. However, building up such an infrastructure is extremely expensive, at least before benefits start to accrue. He also stresses that it should be borne in mind that the US has been a single country with a common language and a common currency for a long time.

There are also less ambitious solutions available to improve the functioning of the EU market to some extent at least. According to Thomas Ordeberg, it is possible to at least marginally improve the EU market by introducing more far-reaching disclosure requirements for brokers and exchanges, and by using technology that makes it easier to find the best price among many competing trading venues, for example.

“One can always hope that brokers themselves, in order to become more attractive to customers, will begin to use technology to improve information retrieval concerning orders and prices. Alternatively, they can be forced by the regulator to acquire such technology or threatened with detailed regulation if they fail to do so.”

The dissertation in full text in DiVA: The Best There Is?: An Inquiry into Best Execution Rules is available as

For further information
Thomas Ordeberg, mobile: +46-(0)70-662 51 86, e-mail: thomas.ordeberg@gov.se

Staffan Westerlund, press contact, Faculty of Law, Stockholm University, phone: +46 (0)8- 16 12 82, mobile: +46 (0)73-784 5031, e-mail: staffan.westerlund@juridicum.su.se